Ben Bernanke goes Wile E. Coyote

John Nyaradi is Publisher of
Wall Street Sector Selector, a financial media site focused on news,
analysis and information about exchange traded funds and global financial and
economic developments.
John's investment articles have appeared in many online publications including
MarketWatch, Trading Markets, Money Show, Yahoo Finance, Investors Insight,
Fidelity, ETF Daily News, iStock Analyst and his interviews have appeared on
MarketWatch, Yahoo Finance's Breakout, National Business Talk Radio, Sound
Investing, and The Index Investing Show. His book, "Super
Sectors: How to Outsmart the Market Using Sector Rotation and ETFs", is
included among the Years Top Investment Books in the 2011 Stock Trader’s
Almanac.

Wile E. Coyote, the famous cartoon character, was forever leaping across wide chasms in pursuit of the Road Runner, flying long distances in thin air, but then looking down and falling into the deep chasm below as gravity took hold.

This week as the Fed debates whether "to taper or not to taper," Dr. Bernanke looks down into the abyss and the world waits with baited breath to see if he can get to the other side.

Starting in November 2008, Dr. Bernanke and his colleagues made a historic gamble to jump across the biggest fiscal chasm seen in our lifetimes. Now, four-and-a-half years later, quantitative easing faces mounting opposition and growing risks. On Wednesday, Dr. Bernanke meets again with his colleagues. Will they get to the other side or will gravity take them crashing into the rocks below?

After so many years of benefiting from the Fed's liquidity pump, the stock market is on edge about the prospect of any cutbacks whatsoever to the quantitative easing program. Sometimes it seems as though mere mention of the word "taper" by the right person can send the stock indices falling. As a result, Dr. Bernanke must tread very carefully as he conditions investors to the idea that the Fed's bond-buying program will eventually go away.

One sure way for Chairman Bernanke to go Wile E. Coyote would be to pull away "the punch bowl" too soon. Such a decision would result from an overestimation by the Fed as to the strength of the economy. Wide disagreement exists over the strength of the U.S. economy, with the International Monetary Fund (IMF) just last week lowering its forecast to below that of the Fed, so it will be a treacherous path that the Fed must walk to wean the U.S. economy and stock market from the pabulum of easy money.

Another potential problem is the growing number of critics on the "hawkish" end of the spectrum, both within and outside of the Federal Reserve. Their opinions range from advocating for the immediate cessation of Fed bond-buying to an insistence that some degree of "tapering" back of monetary easing must be initiated as soon as possible.

As mere mortals with limited psychic abilities, we often find it necessary to turn to Jon Hilsenrath of The Wall Street Journal to get some prescient perspective of what to expect from the FOMC. Mr. Hilsenrath has advised us that a decision by the FOMC to reduce its $85-billion-per-month bond-buying program at this meeting would be unlikely. If the Fed adjusts its forecasts to be more in-line with the IMF's projections, we might see a longer delay than what would result from a decision by the Fed to stand by its March estimates. If the latter were the case, we might see some cutbacks to the program later this year.

As Mr. Hilsenrath and others have emphasized, the June FOMC Statement's Summary of Economic Projections (SEP) will be the most closely read passage of the document. If it is consistent with the March SEP, we can expect a more aggressive approach to change. If the forecast changes, with lower expectations for GDP expansion, expect to see those printing presses continue to churn out money for a while longer.

It is close to certain that Dr. Bernanke will be holding his cards very close to his vest as he faces the world on Wednesday. This will arguably be one of the most important days in U.S. stock market history since Dr. Bernanke, like Wile E. Coyote, is hyperextended in mid-flight across the fiscal canyon and it's still a long way to the other side. Since none of today's distorted market behavior represents anything close to "normal," Wall Street Sector Selector remains in "Red Flag" status, expecting a high-risk environment ahead.

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